Iran War Tests Portfolios and Psychology
Rising Gas Prices and Inflation Risk
If you hit the panic button last Tuesday and moved to cash ahead of the U.S. 8pm deadline warning that Iran must reopen the Strait of Hormuz or face military action, you may have sold directly into fear. By Wednesday, markets reversed quickly after investors absorbed news of a two-week ceasefire announced just before the deadline. The Dow climbed roughly 1,300 points, nearly 3%, as tensions cooled as quickly as they escalated.
Nothing about long-term earnings changed in 24 hours. Revenues did not change. Balance sheets did not change. Retirement projections did not change. Only perception changed. War spending can act as short-term stimulus for defense and industrial sectors. A sustained Iran conflict could add roughly $20B per month in incremental outlays on top of the approximately $1T annual U.S. defense budget. (DOD). At the same time, disruption risk to crude supply routes through the Strait of Hormuz could pressure energy prices higher at the pump, adding potential upside risk to inflation.
Hold On!
Our base case, even if tensions had escalated, was not to make sudden short-term adjustments to clients’ diversified portfolios. History shows markets tend to treat most wars, policy shocks, and geopolitical conflicts as temporary disruptions rather than permanent impairments to long-term economic value.
Across more than seventy years of market history, geopolitical events have typically produced contained drawdowns averaging roughly 4% to 5%, with markets often reaching a bottom in about 18 days and recovering in roughly 39 days, as highlighted in our recent newsletter Iran and the Strait that Moves Markets. Headlines feel dramatic in real time. Market reactions have often been more measured.
The takeaway is not to ignore risk. It is to avoid letting fast headlines dictate long-term decisions. From the sharp COVID selloff in 2020 to the Liberation Day tariff shock in 2025, markets repriced uncertainty quickly, then recovered to new highs once worst-case outcomes did not materialize. Reacting emotionally in those moments has historically been more damaging than the events themselves.
Sell Everything!
We received more than a few calls this past week from newer clients feeling uneasy as dizzying war rhetoric intensified out of Washington. We often remind investors that volatility is the price of admission. That concept sounds sensible when markets are calm. It feels very different when headlines turn urgent and portfolios start moving in real time.
Jon here. We have written for years that one of the most dangerous asset class is not stocks. It is your brain. DALBAR data continues to show that investors often capture only about half to two-thirds of long-term market returns, largely because emotional decisions lead them to buy after markets rise and sell when fear is highest. To paraphrase Warren Buffett’s well-known advice “to buy when others are fearful,” the stock market has a long history of transferring wealth from the impatient to the patient.
When news feels urgent, investors feel pressure to act quickly. Headlines feel permanent in the moment. History suggests they rarely are. We often remind clients during turbulent markets that losses are only realized when investments are sold. Investing is not a casino game in Vegas where each hand resets the odds. It is a long-term process where discipline compounds and impatience compounds mistakes.
Every cycle brings a fresh reason to believe the rules have changed. In 1999 it was the internet reshaping the economy. In 2008 it was the financial system itself. In 2020 it was the global shutdown. In 2022 it was the fastest rate hiking cycle in four decades. Today it is war headlines layered on top of questions about increasing inflation, interest rates, deficits, and whether AI spending will ultimately justify current valuations.
The storyline changes. The emotional reaction does not
Annual Corrections are Expected
Since 1980, the market, as measured by the S&P 500, has experienced an average intra-year decline of roughly 14%, even in years that ultimately finished positive (see chart). Markets do not care whether the backdrop is bullish or bearish, or whether the sitting U.S. President is Republican or Democrat. Declines occur in strong economies, weak economies, election years, easing cycles, and tightening cycles alike.
Pullbacks are not unusual events. They are part of how markets function. They simply never feel routine while they are happening. Markets move quickly because expectations move quickly. Investors often assume new risks require a new strategy. Most of the time they require patience.
We saw this again recently when AI-related headlines briefly unsettled technology and momentum stocks, producing a sharp pullback in a matter of days. Similar reactions occurred during the regional banking stress in 2023 and the rapid repricing of interest rates in 2022. Each episode felt significant in real time. Each proved temporary.
Markets today are influenced not only by human emotion but also by quantitative and algorithmic trading models that respond instantly to headlines, economic releases, positioning data, and even keyword sentiment. When news flow intensifies, these systematic strategies can amplify short-term moves in both directions, making declines feel faster and recoveries feel surprising.
Short-term drawdowns often reflect repositioning rather than permanent damage to earnings or economic fundamentals. When markets digest new information, prices can adjust quickly. When fears stabilize, they often recover just as quickly.
Temporary declines feel uncomfortable. They are also normal and necessary. No asset class moves in a straight line higher. Markets have never rewarded investors for expecting one.
Cash Feels Safe – Until It Isn’t
Consider the past decade. For much of the 2010s, cash vehicles such as CDs, money markets, and savings accounts earned roughly 0% to 2%. It felt conservative. It felt stable. Meanwhile, the cost of living continued rising quietly in the background. Inflation compounds gradually over time, steadily reducing purchasing power.
A useful rule of thumb is that expenses can rise roughly 50% over a decade and potentially double over a 20-year retirement, based on the Rule of 72 and a roughly 3%–3.5% inflation environment. (see chart) If you estimate needing $100K per year at age 65, that figure may be closer to $150K by age 75 and potentially approach $200K later in retirement depending on inflation trends.
If savings remain in cash earning 2% to 3% before taxes while withdrawals run closer to 4% to 6% annually, the math begins working against you. The portfolio is no longer compounding once you back out net of tax returns on cash. It is slowly reverse amortizing, meaning principal is gradually drawn down as purchasing power erodes over time (see chart). You may be more or less spending down your own principal.
Doing nothing can feel disciplined and safe. Over extended periods, it can quietly reduce financial flexibility. If an overly conservative allocation results in spending down principal throughout retirement, that may be reason enough to reconsider the role of growth assets within a portfolio.
There is no free lunch in investing. Higher expected returns come with periods of uncertainty. Volatility is not a defect in markets. It is part of how long-term returns are generated.
While long-term inflation has averaged close to 3% annually since 1926, inflation since 2000 has averaged roughly 2.3% to 2.5% per year, reducing the purchasing power of a dollar to about $58 over the past 25 years, a decline of roughly 42%. Source: U.S. Bureau of Labor Statistics, CPI-U (2000–2026) (see chart)
Investors often mistake discomfort for danger.
Disciplined portfolios are built with the expectation that headlines will periodically create stress. Diversification and asset allocation exist because the future is unpredictable. A sound strategy does not require correctly forecasting each geopolitical event, election outcome, or economic surprise.
Markets often recover faster than sentiment. By the time the outlook feels clearer, prices have usually already moved higher. Selling during periods of uncertainty often means buying back at higher levels once confidence returns.
Behavior matters more than prediction. Investors experience markets day to day, not as long-term averages. That makes discipline hardest precisely when it matters most. Periods like this reinforce a simple truth. The greatest advantage available to investors is behavioral. Not reacting to every headline is often more valuable than attempting to anticipate each one.
Markets will continue to respond to geopolitics, policy changes, and economic data. Some weeks will feel calm. Others will not. Long-term results should not depend on predicting which week will feel uncomfortable.
Your portfolio is designed to absorb uncertainty and to help capture less volatility than the benchmark headline indices like the S&P 500 and DJIA indices. Temporary volatility does not signal permanent impairment. Staying invested when uncertainty feels highest remains one of the most important decisions an investor can make.
The Iran War Tests Portfolios and Psychology: What does it mean for Investors
Iran is nearly four times the size of Iraq and roughly comparable to Alaska, which helps explain why markets pay close attention to any disruption affecting energy supply routes tied to the region.
Large-scale regime change conflicts have historically required substantial ground forces. By comparison, roughly 50,000 U.S. troops are currently positioned across the broader Middle East, well below the approximately 250,000 coalition troops assembled ahead of the 2003 Iraq invasion. While rhetoric remains elevated, current positioning suggests a contained conflict scenario remains the base case rather than a prolonged ground war.
Markets tend to focus less on headlines and more on duration. Roughly 20% of global oil supply moves through the Strait of Hormuz, along with key inputs used in fertilizer production. When that flow is threatened, energy prices respond quickly and often ripple through the broader economy.
Gas prices have risen sharply since tensions with Iran escalated in late February, including a roughly 21% jump in March alone, helping push CPI back up to 3.3% year over year.(source: AAA Gas Prices) Energy prices often act as the fastest transmission channel from geopolitical conflict to consumer inflation
Supply Side Shocks Are Back
Inflation rose to 3.3% in March, driven largely by higher gasoline prices, marking the first major inflation report since tensions with Iran escalated. Supply disruptions affecting oil, fertilizer, and helium have the potential to pressure prices across the economy in the months ahead.
Energy feeds directly into agriculture, plastics, chemicals, and transportation. Fertilizer production relies heavily on natural gas inputs, which means sustained energy pressure can influence food prices with a lag. Helium shortages can even affect semiconductor manufacturing and medical equipment.
Higher fuel costs ripple through supply chains and can gradually increase the price of everyday goods across transportation, packaging, and logistics. Markets can absorb short-term spikes in oil prices. They tend to struggle more with uncertainty around duration.
If energy prices remain elevated for several months, in our opinion inflation could trend closer to the 4% to 5% range than many forecasts currently assume. That could delay rate cuts, keep borrowing costs elevated, and produce a more uneven market environment than investors experienced during the liquidity-driven rally of recent years.
This does not automatically imply recession or a major bear market. It may simply suggest the next phase of the cycle relies more on earnings growth and broader sector participation rather than multiple expansion concentrated in mega-cap technology.
After the Headlines Fade
The underlying U.S. economy remains relatively resilient, with positive corporate earnings growth still expected this year. Markets have historically recovered following geopolitical shocks including conflicts in Iraq, Afghanistan, Ukraine, and the Middle East more broadly. (see chart) What ultimately mattered in those periods was not the headlines themselves, but the trajectory of earnings, interest rates, and economic growth.
Ceasefires are constructive developments, but they are rarely final resolutions. Headlines will continue to evolve, and negotiations can take time. Markets typically adjust as clarity improves.
While no outcome is guaranteed, maintaining diversification and focusing on long-term fundamentals has historically proven more reliable than reacting to each geopolitical development.
Bottom Line: The Iran War Tests Portfolios and Psychology. Geopolitical events can create real uncertainty, particularly when they affect energy supply and inflation expectations. Oil prices influence transportation, food, manufacturing, and ultimately consumer prices, which can create short-term volatility across markets.
At the same time, the broader economic backdrop remains reasonably stable. Consumer spending continues to support growth, and corporate earnings are still projected to expand this year. While inflation has proven sticky in recent months, much of the pressure can be traced to energy costs and supply-side disruptions rather than a broad-based collapse in demand.
Markets have navigated similar periods many times before. Short-term shocks can feel disruptive, but long-term market direction has historically been driven more by earnings growth, interest rates, and economic fundamentals than by individual geopolitical events.
Energy price spikes can create temporary headwinds. They rarely alter the long-term trajectory of diversified portfolios.
The discipline to stay invested during periods of uncertainty remains one of the most important advantages an investor can have. Well-constructed portfolios are designed with the expectation that headlines will periodically create volatility.
Markets will continue to respond to policy decisions, economic data, and geopolitical developments. Some risks will fade quickly. Others may take longer to resolve. Long-term investors are generally best served by focusing on broader economic trends and maintaining diversification rather than reacting to each disruption.
Preparation, not prediction, remains the most reliable investment strategy. Discipline is still the most underappreciated asset class. We hope you enjoyed this week’s newsletter: Iran War Tests Portfolios and Psychology.
For more information on our firm or to request a complimentary investment and retirement check-up, call (561) 210-7887 or email jon.ulin@ulinwealth.com.
Author: Jon Ulin, CFP® is the founder and Managing Principal of Ulin & Co. Wealth Management, an independent advisory firm based in South Florida for over 20 years. As a fiduciary wealth advisor, Jon helps successful individuals, families, and business owners nationwide with multi-generational planning, investment management, and retirement strategies. Learn more about Jon and our team at About/CV. or call (561) 210-7887.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
